5 Steps to Investing in a Company

05 Jul 2023

JM Financial Services

Investing in stocks is a wonderful way to make your money work hard and accumulate wealth in the long run. When you want a core portfolio that gives you regular dividends and steady capital appreciation, stocks are the way to go! If you are new to investing and need some help with stock portfolio creation, here are some steps you can take to verify a company’s merit and make the right investment decision.

Steps to Investing in a Company

Understand The Product or Service
Warren Buffet, the legendary American investor, advises new investors not to invest in something they don’t understand. This is a fundamental principle of stock market investing. Unless you understand what the business does, how can you grasp its position in the market and chart its growth trajectory?

Let’s understand this better with an example. Suppose a friend, an astrophysicist, asks you for money to build a giant telescope. As a software engineer, you know nothing about telescopes, but your friend promises that he is fixing some technical glitches and it will be ready to launch soon. They promise that it will be the most sought-after technological marvel in its field once the telescope launches. Hence, it will make you a lot of money.
On the other hand, another friend, a software engineer, tells you they are creating software that will provide stock market advice and simplify stock market investing. You understand the process and the software and see that it has potential. It is an easy decision to make about where to invest.

To create a core portfolio, you need to identify companies you know well or learn about them well and then invest in them regularly.
Evaluate the Company’s Fundamentals

Once you have familiarized yourself with the company’s business, the next point of action is to check if the company is fundamentally strong. Fundamental research helps you understand a company’s financial statements, competitors, and the market it operates in. It gives you a holistic understanding of the company’s growth potential.

You can begin fundamental research through a fundamental company analysis by regularly looking at the financial results. Read its balance sheet, profit and loss account, and cash flow statement. Use financial ratios to understand its liquidity and profitability positions. You must also analyse the company’s performance relative to its competitors, do an industry analysis, and study its management. You can find all of that information in a company’s annual report.
Read Research Reports

It’s not enough to rely on the information you get from a company’s annual report. You need to gain a holistic understanding of a company’s performance and prospects. For this, you must read reports from experts in a field. Your broker can provide you with fundamental research and technical reports on listed companies to improve your stock market investing. Analyst reports can help you understand the finer points of the company. Analysts are experts who can evaluate a company’s business better than you. Most analysts have access to sophisticated data that helps them crunch numbers and create profit estimates. You must learn about things that influence the profits of businesses.
Understand The Future

So far, we have discussed the steps you need to take to understand the company in the present. However, a company’s past can also give you important information about how it may operate in the future. Spend time evaluating a company’s historical performance. Look at historical prices, what kind of business it did in the past, and the management history. You will find out about the company’s resilience during tough times, how it reacted to challenges, the approach it took to get out of sticky situations, how it treats its employees and its ability to deliver on its promises. A company with a strong history will likely emulate that in the future. 5. Create a portfolio
Create a portfolio

After you have gained a good understanding of a company, including its business, products, services, financials, competitors and the ecosystem in which it operates, you can invest in it. Using these steps, you can create a stock portfolio. There are different routes you can take to make your investment in a company:
• You can choose to invest in the company’s stocks. If it is already trading in the secondary market, you can purchase shares at a price that justifies its valuation.
• You can buy the company’s bonds or debentures.
Generally, when you begin stock market research and investing in companies for the first time, it’s best to invest in public companies for which sufficient information is available in the market.

Final Word
Investing in companies is no longer rocket science. Today, you can open a Demat account and Trading account online with reputed financial institutions and make your investments at the click of a button. However, you should always undertake sufficient research before you invest in a company. With JM Financial Services, you can embark on your stock market investing journey with ease.